On the horizon await the Model X luxury SU-EV and the Model E mass market vehicle, the keys to Tesla's future

Tesla Motors, Inc. (TSLA) and its founder and CEO, Elon Musk, are slowly turning some skeptics into believers. From Norway to China and back home to the United States, the last couple weeks have been a rollercoaster ride when it comes to news of Tesla's March sales. But when you add it all up momentum clearly seems to be on Tesla's side.

I. Model S Sales -- Slow in the U.S., but Hot in Norway

Tesla shares currently hover around $210 USD per share, a disappointing drop of almost 20 percent from the highs of ~$250 USD per share we witnessed in early March. And we'll likely see more shifts in weeks to come.

On May 7, investors will get the electric carmaker's official earnings report. But already sales numbers for March have trickled out from various sources including vehicle registrations and tax rebate application.

The first early results to look at are U.S. sales of the Model S sedan. Overall this is the one part of the Tesla news that looks a bit disappointing.

While its an unquestionably lauded and feted vehicle, the Model S sedan continues to face one insurmountable barrier in the U.S. -- price. Currently, the Model S with the base 60 kWh battery retails for around $69,900 USD in the U.S. before tax credits and sales taxes.

Barclays Capital (Barclays plc (LON:BARC)) and Gartner Inc. (IT) analysts toldThe LA Times that Tesla moved an estimated 4,600 Model S vehicles in the U.S. in the first three months of 2014 -- 1,600 in March and 3,100 in January/February.

The 2014 Tesla Model S sedan

That total is up only 1 percent on a year to year basis. Brian Johnson, an automotive analysis for Barclays Capital tells The LA Times:

We believe that Model S demand in the U.S. has plateaued.

That's seemingly a setback for Tesla, which hoped to hit sales of 35,000 Model S vehicles this year. But outside the U.S., the picture looks a lot rosier for Tesla.

II. Norway -- Tesla's Second Home

At the start of last year, Tesla was only officially selling Model S sedans to buyers in two nations -- the U.S. and Canada. Tesla's Q&A webpage for the Model S still reflects this, stating:

Model S is currently only sold and serviced in the US and Canada. If you export your Model S outside of these countries, Tesla will be unable to service your vehicle until it has been brought back to its home market. We strongly recommend that you reserve a Model S in the market where you plan to drive it. European deliveries will begin in summer 2013, and in other regions starting in 2014.

Last year indeed brought a launch in Europe, albeit a less flashy one than some were expecting. Tesla already has nine stores in Europe from its Roadster sales campaign; these were repurposed for Model S sales.

These include stores in Europe's biggest electric vehicle market, Norway (more on this shortly), and Switzerland. Tesla also prepared for the Model S's European invasion with the quiet launch of three new dealer sites -- London, UK; Brussels, Belgium; and Amsterdam, Netherlands, plus four new service centers in Brussels; Amsterdam; Frankfurt, Germany; Hamburg, Germany; and Vienna, Austria.

While Tesla has pledged a broad rollout through much of Europe, its Q3 2013 deliveries began in three select nations [PDF] -- Norway, the Netherlands, and Switzerland. These markets were selected as they all traditionally had large tariffs/surcharges for fossil fuel-burning "dirty" sport scars, but have pledged substantial breaks in the fees charged for foreign electric vehicles.

Here's a quick rundown on the sales success thus far.

Note the statistics come from ev-sales.blogspot.com, but have been confirmed by other third-party sources such as The Wall Street Journal.

Last year Tesla moved a little over 1,900 Model S sedans in Norway, its top market (and ironically also the European Union's top oil producer). Note the Norwegian market is so lucrative due to the "Engangsavgift" (one time car fee).

These kind of steep penalties are somewhat unique to Norway. Perhaps that's why Norway has seen sustained sales when others have fallen.

III. Europe -- Positive Momentum Grows

A post by a Tesla enthusiast compiling the ev-sales.blogspot.com numbers lists the total 2013 sales by European nation as:

Norway - 1986

Netherlands - 1127

Switzerland - 213

Germany - 204

Belgium - 148

Denmark - 112

Austria - 48

France - 19

Italy - 8

As you can see from the previously listed Netherlands sales numbers for Q1 2014 (207), Tesla has actually seen sales drop in this market where it did so well in 2013. But fortunately for Tesla, that appears to be exception rather than the rule. One possible explanation is that the savings in terms of taxes, fees, and parking are much larger for businesses than private buyers. Clearly not all businesses are interested, so it's very possible that sales in 2013 were heavily driven by businesses (who stand to gain the most) and the current lower levels represent a heavier percentage of individual buyers.

Clearly the biggest sales success is in Norway, where Tesla is literally shattering sales records for vehicles of any kind -- not just EVs. As shown above, in March Tesla reportedly shipped 1,493 Model S sedans to Norwegians, breaking a nearly three-decade-old sales record set by Ford Motor Comp. (F) in 1986 (with the Sierra sedan).

The Tesla Model S sedan saw incredible sales in Norway, thanks to the government assist. But sales in other parts of Europe with smaller incentives were also impressive.
[Image Source: Tesla Forums]

Other Q1 2014 sales high points included Denmark (111), France (58), Germany (239), Sweden (34), and Italy (20) are all near -- or in some cases well above -- their full year totals for last year.

Crunching these sales numbers, it appears Tesla sold roughly 2,900 EVs in Europe in Q1 2014 to match its 4,700 in the U.S. and 60 in Canada. In other words, the EU is accounting for more than a third of Tesla's sales -- not a bad start considering complaints of lacking infrastructure in some parts of Europe.

And there's more good news for Tesla -- it expects to start deliveries of Model S sedans to the UK by June or July. The expected price is £49,900 (~$83,800 USD). Given the £5,000 ($8,400 USD) "UK Plug-in Grant" (a tax deduction), UK sales should be relatively brisk, making up for whatever shortfall might happen in Norwegian sales.

IV. The Chinese Connection

In the near term, Tesla is looking to establish a sales presence in China starting this year. China is home to a fast-growing luxury vehicle market, as the Asian nation marches towards surpassing the U.S. as the top global economy. Unsurprisingly, China is also one of the hottest luxury electric vehicle markets as well, in terms of growth potential.

Tesla clearly recognizes the importance of China to its short-term gains. In Nov. 2013 Tesla opened its first Chinese showroom in the capital city of Beijing.

While the Model S sedan is priced at CN¥734,000 (~$118,000 USD) thanks to the whopping 25 percent tariff China charges foreign automakers, Mr. Musk believes that the Chinese market could become a valuable addition this year alone. Commemorating the first eight deliveries of Model S vehicles to Chinese buyers, he told Chinese enthusiasts this week that he believed as many as 5,000 Model S sedans might be bought in China this year. He comments:

[It's] just a guess. [But] I do think that's probably a good number. Maybe it will be higher. I don't honestly know. Thus far the response has been very positive. I'm incredibly appreciative of customers like you for taking a chance on a new product from a new company. Without customers like you, we would have no chance.

If accurate that would cut the number of Model S sedans Tesla would need to sell in Europe and North America to meet its target to 30,000 -- which seems well with reach given the Q1 2014 sales of ~7,700 vehicles in these regions. That hints at how important the Chinese market is to Tesla, even if its potential is handicapped for now.

Elon Musk was forced to offer an apology of sorts to Chinese customers after Tesla let its previous goal of delivering to China in January 2014 slide. Mr. Musk told Chinese buyers at this week's event that the delay was made in their best interests, as Tesla feared a repeat of its troubled European rollout, in which buyers in certain regions such as the Netherlands and Norway complained of lacking charging infrastructure.

During the last several months, Tesla has begun to build in Beijing and cooperate with authorities to build in other major Chinese cities, standardized EV chargers to give Model S buyers ample places to juice up.

The Model S itself comes with a household charging station, but in the U.S. buyers typically lean heavily on public chargers. Mr. Musk stated:

We intentionally held back on the debut to the Chinese market until we were confident of that. I met with [Chinese buyers] earlier today and personally apologized.

To eliminate the tariffs on the Model S and other future vehicles -- a key detriment to Tesla's long-term competitive prospects in China, Tesla must traverse some challenging obstacles.

Chinese law requires U.S. automakers to team up with a Chinese firm in order to sell without tariffs. Elon Musk told reporters this month that it will take over a year to decide who to team up with, although he implied such collaboration will likely be in the works. Whoever it picks to team with, Mr. Musk indicated that Tesla would look to build a factory to sell directly to Chine sometime in the next 3 to 4 years.

V. The Model X (2015) -- Can Troubled SU-EV Make it to the Market?

But as much as Tesla's current image is predicated on its current successes and shortcomings, much of the current hype surrounding it, relates to its bold plans for the future.

Tesla is currently America's fourth largest automaker, but it wants to ascend even higher. One key to that goal is the Model X luxury SUV, which is scheduled to begin shipping next year.

The Model X was first unveiled in 2012, but has become a minor boondoggle of sorts for Mr. Musk. Tesla is growing somewhat desperate to get the delayed vehicle out the door. Elon Musk had originally suggested a 2013 release at a price point of $49,900, but it was delayed to 2014 and the price was expected to rise. And this February Tesla announced yet another costly delay -- to 2015.

Tesla's Model S is currently built at the historic NUMMI factory in Fremont, Calif., a facility formerly owned by Toyota Motor Corp. (TYO:7203). The facility can accommodate up to 500,000 vehicles per year (~41.7k per month). It appears Tesla is currently using only a little under a fifth of the plant's total capacity. That gives Tesla plenty of capacity to handle whatever Model X sales it can generate.

Like the Model S, the Model X is also expected to command a premium price point, but is expected to avoid cannibalization by expanding Tesla's reach to new markets. One such market is the often-underserved affluent female buyer segment, which accounts for a large chunk of luxury SUV sales.

VI. Model E -- Hello, Mass Market

But the most crucial key to Tesla's growth plans is the Model E, also known as Tesla's Generation 3 electric vehicle. The Model E will be Tesla's first mass market vehicle. Mr. Musk commented on the Model E to Bloomberg back in May 2013:

That's really the car I wanted to create from the beginning: A compelling, affordable car that has a range of at least 200 miles.

The price point for that vehicle will be similar to General Motors Comp.'s (GM) modestly successful Chevy Volt, selling at under $40,000 USD -- or roughly half the price of the Model S sedan. It reportedly will be driven by a 48 kWh battery stack and be 20 percent shorter than the Model S.

One big question mark surrounding the Model E is the launch date. If Tesla releases the vehicle late next year (in time for the 2016 model year), it will likely have to tool the NUMMI plant for Model E production. That's very possible given the reportedly design similarities to the Model S and the NUMMI plant's idle capacity.

Given the delays to the Model X rollout it would not be surprising to see the launch slide to 2016 or even early 2017. Indeed, as of last year Mr. Musk was predicting a rollout in 3 to 4 years (2016 or 2017) and that release window appears in line with the company's slide deck [PDF] for the gigafactory.

But aside from determining a feasible rollout timeline, there are much bigger questions of whether Tesla can truly engineer a profitable mass-market electric vehicle, particularly one at such a low price and such a big spec.

Aside from the release date, perhaps the biggest riddle surrounding the Model E is how low Tesla will be able to drive the cost of the battery pack. While there are some obvious sacrifices Tesla can make in terms of performance and features that will trim ten thousand dollars or more off the base price of the Model S, a major component of its price is still the inescapable cost of the battery pack.

In short, to turn a profit on the Model E Tesla must manufacture a complex battery system at rates drastically lower than any rival automaker has been able to do to date, perhaps at as little as a sixth of the cost per kilowatt-hour.

But that cost might not be as high as some imagine. The Model S's battery pack, for example, would be estimated to cost either $42,500 and $55,250 USD for the 60 and 85 kWh variants, according toThe MIT Technology Review's information on rival EVs like the Chevy Volt. But according to a recent interview with Tesla CTO JB Straubel, Tesla is incredibly already only paying a fraction of that. He states:

They’re way less than half, actually. Less than a quarter in most cases.

The key is small cell batteries. Tesla's competitors virtually all opted for large cell battery designs and they paid the price -- literally. At this point there's little arguing the fact that Tesla's approach is more cost effective, even if companies like GM continue to stubborn argue that someday large cell packs will be cheaper.

The Tesla Model S battery pack

Clearly Tesla knows its batteries, but it faces some key challenges. First, it must prove that it can truly bring down costs by dramatically increasing production, an approach that will require a lot of risk and in some cases dramatic new methodologies such as the cutting out the middlemen from the raw materials supply chain.

For Telsa's primary battery partner -- Japan's Panasonic Corp. (TYO:6752) -- this is a plan that could bankrupt not only Tesla, but its ally, should it fail. Commented Panasonic President Kazuhiro Tsuga earlier this month to Bloomberg:

Elon plans to produce more affordable models besides Model S, and I understand his thinking and would like to cooperate as much as we can. But the investment risk is definitely larger.

While some worry Panasonic could panic and bail on Tesla's bold vision, at the Chinese press events Tesla CEO Elon Musk reiterated that the current plan is to work with Panasonic to build the Model E's battery pack.

Tesla's plan to reduce costs via the gigafactory is essentially a fresh spin on a rather old argument. It is echoing what EV proponents have been saying since the movement began to pick up steam a decade ago -- scale will bring down costs. It's a well-argued viewpoint, but there's never been the chance to fully test it -- until now.

Tesla says it will be using more lithium batteries than the entire global electronics market when the Model E gets up to capacity. It predicts that kind of scale will allow it to decrease the cost of the battery pack by as much as 30 percent per kWh. If it can do that, it could be building the 48 kWh pack for as little as $6,000-7,000 USD a truly unbelievable achievement given the EV industry's history of relative disappointments.

There is little denying that Tesla has a remarkably bold plan, and one that's predicated to Tesla being able to successfully leverage its expertise in the luxury EV market to create a more compelling mass market sedan with some inherited perks from its luxury brethren.

That'll be a tough task, both engineering-wise and financially speaking, but Tesla's success forces both skeptics and believers alike to seriously consider the plan. After all, Tesla already successfully navigated the road from the limited-release high end of the luxury market (Tesla Roadster), to more mid-priced, high volume luxury market (with the Model S and Model X). The road to the mass market is fraught with peril, but not necessarily more so than the path Tesla had to navigate to travel from the Roadster to the Model S.

they have the model s as taxis here in Norway. Theyre becoming a pretty common site on the road. The tax breaks and other incentives also help. The huge taxes they level against ice vehicles is another big factor.

importing my mustang would cost about 250k+! A stock one would be much cheaper but mines modified. Fortunately Im exempt from the taxes. Then again, a stock one will still cost you more than a tesla!

The economy here also makes the car relatively cheap here. A couple coworkers have them and they plug them in at work. I live about 17km from work and that's a 20-30min drive and that's considered far. Avg speed is about 25mph in Stavanger.

Go to finn.no and look at the car prices and youll see how much used cars go for! insane!

The tesla makes sense here in Norway so I see why theyre popular here.

Ive been here for almost 3yrs now. Luck of the draw on assignments. I work for NATO.

I know a lot of expats that work for the oil companies and other industries here. They love the money here. You get paid a lot. Of course everything here is extremely expensive here but there are ways around that.

The max speed limit is 90kph, very few tracks to race on. Though they are building a mega racing complex near here.

The weather rarely gets into the 70s, usually stays mid 50s-60s. Rains a lot.

Even still, its absolutely beautiful here. If you like the outdoors, then this is one of the best places to go.

I would definitely recommend a trip here. Beware it is very very expensive. A typical taxi trip to my house costs me about 550KR, so just short of $100(17km. McDonald's or any other typical fast food meal is about $20.

Don't hesitate; go. I did for an aurora hunt and it was the trip of my life. The scenery is gorgeous - everywhere. The people are all beautiful and friendly. Seriously. The food, no matter what cuisine, is prepared with 5 star ratings. It's scary, actually.

Be prepared for it to be expensive, though. I was only there for a week, but it was pretty clear that everything was on average 2x as expensive than in the States.

Tesla won't do nearly as well in Germany in terms of market share as cars aren't taxed so there is no tax incentive for the Model S. Also unlike Norway as we know Germany makes lots of cars them self and US cars in general aren't highly regarded there(it's like that in most of the EU), so those factors are in play as well.

Still with 16x the population Germany Tesla should still get decent numbers even with a low market share.

I think 7700 sales all Tesla could have hoped for, given that its production capacity was said to be 600/week. Their Q1 guidance was actually only 6400 sales.

Their official goal is 35,000 units for the year and production of 1000/week at the very end of the year. So I guess 8k sales Q2, 9k Q3, and 10k Q4? Any faster ramp and you're over 35k.

China definitely has a lot of potential for Tesla. The number vehicles on the road there is growing like crazy, and they just passed the US as the world's largest importer of oil. Between that and air pollution, it's no wonder they have a publically stated goal of getting EVs out there. Local EV companies like BYD are going to boom.

I actually thought the hot part of their sales would last quite a bit longer than 1 year. If it's already in the "people that want already bought it" phase, then there's no way it will ever hit 35k a year.

I was very critical but I expected WAY better numbers than this. Guess I'll wait a quarter or two to make sure but if sales don't pick up, the Model S will be a flop. They can't be happy with these numbers. Wonder what they'll do about it (cause they gotta do something).

Also from the source article:

quote: Outside of Norway, European sales are “seemingly soft.” There is also the potential for a decline in Norway if electric vehicle incentives there are not renewed, he added. “Tesla will be dependent on strong Chinese demand,” Johnson said. “While we expect strong initial interest from early adopters in China, we see challenges to broader luxury market adoption.”

Why sales in The Netherlands have fallen is very simple: Since january alot of fiscal benifits have simply been stopped. Basically we stopped subsidizing the cars, and look what happens.

The reason why they stopped is also very simple: Our government relies very heavily on car tax/tariff incomes. Just as an example right now 1 US gallon of gas costs about $9,50. The average cost to own a mid-sized car is about $525 a month without gas (there's no SUV's here as well as very few muscle cars/sports cars - it's simply unaffordable). Basically, too many people started actually buying the cars, it cost the government too much money, so they pulled the plug (pun intended).

In 2015 the last benifits, the road tax and the tax on purchase (mainly consumer stuff while the stuff that's been canceled was mainly corperate), will come under review. If they aren't extended expect another drop.

It is true that the situation in The Netherlands got out of control. That happened a long time ago when the government considered mobility can be, as we call it, a cow that you can milk as much as you like.In 2016 the benefit for road taxes wil probably disappear and for me that is not a problem. As a Model S driver as use the road like anybody else so I am willing to pay too.

More interesting is the fact that all other taxes are related to the emissions of the car. Those taxes you pay when buying the car and the more emission, the more you pay extra.

As any other (real) electric car the Model S has zero emission. The fact that some of the power is generated in plants that use coal is not an issue because there are also taxes that are paid before the electricity gets to the car. Besides that, my solar panels generate enough energy to feed both our Nissan Leaf as our Model S.

By buying the Models S I also bought a prepaid, (car)lifetime long, free use of electricity that is delivered by Tesla itself. Much of that is and almost all of it will be eventually sustainable (solar) and the same company will make it possible to save energy for later use (battery development). It is a brilliant idea. While we are still stuck in discussions about the fact that (maybe) our neighbor uses a bit more so he should pay more, which means an extremely expensive back office, having a flat rate use saves all that money and extra work. And, why not make the solar energy free as soon as we contributed to the building of the facilities? Something that will be a question in some years or maybe sooner.

We will have a fundamental discussion about taxes and transparency on government site and I am looking forward to it.

And as expected sales (which actually means deliveries) dropped after dec. 31 2013 but at this moment there are again many people waiting for their Model S. (Not only in our country)

Like Norway we have crazy car taxes and the 112 cars sold here is with Tesla just starting out. Already they have like 1/3 of what you'd call the Luxury car market here and they are gonna make a killing in the segment below luxury.

Here the Model S costs about the same as a BMW 328i(and that's with no options or extras). Imagine that the Tesla S was $38K car in the US and you can see the impact. Now since it's not like the Tesla is suddenly costing 1/3 as instead all other cars cost 3x so it still takes more money than many will/can spend on a car, but the market share has potential to be big.

Producing the Model X when they're constrained on supply for building the Model S would be stupid and would overstrain the company. I believe their best option at this point is to deal with the supply issues, keep building the Model S and keep working towards the production of the Model E. The Model X is a distraction that won't help the bottom line for Tesla anytime soon.

Once again, sales does not equal demand when you are production constrained.

- Tesla said they can produce about 7400 cars in Q1 due to Panasonic cell suply.- They plan to have 1000 on a ship to overseas customers at the time of Q1 financial closing- So only the remaining 6400 can be delivered to customers = sales (as in $) realized within the quarter- Some of those sales need to go to European customers as many have been waiting 3-4 months- Whatever remains can be delivered in the US.

"Well, we didn't have anyone in line that got shot waiting for our system." -- Nintendo of America Vice President Perrin Kaplan